Billabong International Company Financial Analysis


This report provides an analysis and evaluation of current and prospective financial performance and position of Billabong International Limited. It shows the general direction of the company after critically examining various financial ratios. Key management decisions are also examined and their implications on the general performance of the company. The analysis is mainly based on financial ratios in accordance with the International Financial Reporting Standards.

Company Overview

Billabong International Limited is a company that was incorporated in Australia in 1973 and listed in the Australian Securities Exchange in 2000. With time, it has grown into a large multinational company with operations in more than sixty countries (Beyer, 2010). The company specializes in selling surf skates and snowboard accessories; it also provides licensing services for investors.

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Analysis and Findings

The following are analysis and findings of the company’s consolidated financial statements for the financial years ending June 2009 and June 2010 (Billabong International Limited, 2011). The figures used below are expressed in Australian dollars,

Profitability ratios

Ratio 2009 2010
Gross profit margin 53.30% 54.49%
Operating profit margin 12.45% 13.85%
Net profit margin 9.145% 9.835%
Cash flow margin 10.51% 12.61%

The profitability ratios indicate an increase in the company’s profits in proportion to the sales made for year 2010 as compared to year 2009 (Billabong International Limited, 2009). This may have been as a result of better methods used in handling inventories resulting to cost savings. A change in customers’ taste in favor of the company’s products may have also led to the improved profitability ratios. Market expansion may also have occurred leading to increased revenues with the fixed costs of the company remaining constant. An investor relying on these ratios for investment decisions may conclude a general improvement in the business of Billabong International Limited, which may not be the case when further business ratios are put into consideration.

Liquidity ratios

Ratio 2009 2010
Current ratio 3.302 2.477
Quick ratio 2.4813 1.799
Cash ratio 1.3125 0.5884

Liquidity ratios show how readily a business can pay its financial obligations in the short term by comparing its assets with its liabilities. The calculated current ratios above indicate that the company could adequately cover its liabilities without getting into liquidity problems in the two financial years (Billabong International Limited, 2009). Quick ratio shows how well a company can pay its current debts without having to rely on its inventory. Cash ratio shows the company’s ability to pay off all its short term financial obligations using cash or assets equivalents only (Bull, 2007). A decrease in liquidity ratio shows that a company’s ability to cover its current liabilities has decreased, as it happened in the financial year 2010. However, quick ratio and cash ratio indicate deterioration in the liquidity position of the company in the year 2010 as compared to 2009 (Billabong International Limited, 2009). Any deterioration in the liquidity position of the company may have resulted from increased usage of debt as opposed to internally generated funds. However, high liquidity ratios should not always be considered to be beneficial to the business. A situation may arise where the business is investing too much in current assets, which may be unnecessary in the achievement of the company’s wealth and in the maximization of goals.

Efficiency ratios

Ratio 2009 2010
Debt collection period 88 days 98 days
Sales to inventory ratio 6.59 times 6.17 times
Assets to Sales ratio 1.329 1.489
Sales to working capital 2.348 2.833
Accounts payable to sales 0.1663 0.2126

Efficiency ratios measure how efficiently the company is managing its receivables and utilizing its other assets. Debt collection period is the duration that a business takes before its accounts receivables are paid. The debt collection period increased from 88 days in 2009 to 98 days in 2010. This may indicate a mismanagement of accounts receivables which may result into increased bad debts (Bull, 2007). The sales to inventory ratio shows the number of turns in inventory for a particular financial year. A decrease in the sales to inventory ratio, as experienced in the year 2010, may be as a result of decreased sales or increased inventory levels. The assets to sales ratio measure the percentage investment in assets that is needed to generate the annual sales level. The smaller the assets to sales ratio, the more efficient the business is in utilizing its assets to generate sales. The accounts payables to sales ratio shows the proportion of sales that is made on credit. An increase in credit sales may put the business into cash flow problems. Efficiency ratios should always be checked and controlled so as to ensure proper utilization of assets in revenue generation.

Investments Ratios

Ratio 2009 2010
Market price per Share $12 $10
Earnings per Share 69.2 Cents 58.3 Cents
Dividend per Share 18 Cents 18 Cents
Earnings Yield 0.015 0.018
Book value Per Share 2.6 2.64
Price Earnings Ratio 17.341 17.153
Return on Capital Employed 7.865% 8.14%

The ratios above show returns on investors’ funds. The company’s stock lost a significant value in the stock market consequently eroding the shareholder’s wealth. Although dividend paid out remained constant, earnings per share decreased as the additional shares issued were not fairly rewarded. The company seems to concentrate more on reinvesting while it is still maintaining a fairly constant dividend payout so as not to discourage its investors. The company is good for long- term investors who are interested in wealth creation but may not be appealing to short-term investors as the dividends are fairly low and the share price keeps on fluctuating.

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Gearing ratios

Ratio 2009 2010
Capital gearing ratio 1.603 1.909
Debt to equity ratio 0.8867 0.815
Times Interest Earned Ratio 102.05 Times 82.6 Times
Equity ratio 53 % 55.09%
Debt ratio 47% 44.91%

The ratios show to what extent the company is being financed by creditors. The company is in a position to reduce the creditors’ worth and influence hence it is moving towards the right direction. The reason behind this may be because the management is efficiently using shareholder’s funds and also reinvesting some of the profits thereby minimizing external borrowings (Spencer, 2010). This is evidenced by the overall decreased leverage. This reduces the risk of being put under receivership or liquidation due to creditors panic and fear that the company is operating at their mercy.

Recommendations

The company should seek cross listing so as to have access to large amount of capital and increase global ownership hence more sales and cushion investors from frequent share fluctuations (Brigham & Houston, 2009). Also it should improve debt collection period to prevent it from cash flow problems (Spencer, 2010). In addition, the company should pay closer attention to high level liquidity to establish steady and fixed cost of production and provide a more competitive basis for sale. In order to attract more investors, the company should concentrate more on the current investors. Specifically, it should introduce effective strategies enhancing profitability and performance of the company. Ignorance of the current problems and major focus on future perspectives will not contribute to increase in the ratio of investments.

Long-term goals of the company are well established. However, they do not have a strong basis at the present moment. In particular, the emphasis on credit sales provides fewer guarantees for future success because it is quite difficult to calculate possible revenues when the debts are not accurately defined. In order to avoid cash flow problem, it is purposeful to limit the number of credit sales and introduce new terms of payment. Effective accomplishment of goals largely depends on the debt and liquidity ratios because excessive credits provide greater threat to the increased number of debtors. In this respect, the maximization of goals can be carried out through the analysis of those levels.

Profitability levels are also considered to be the major concern that the company should take into deeper consideration. To be more exact, the company should attain much importance to constantly changing patterns and preferences. Customer’s demand is shifting with regard to the shifts in society. In this respect, the revenue can be significantly increased with the presentation of new marketing strategies. In general, strategic orientation can provide more perspectives for future development.

Finally, accuracy, transparency, and constant track of input and output resources can minimize the probability of decreased results in future. The company will able to handle operations in a more effective way.

References

Beyer, S. (2010). International Corporate Finance – Impact of Financial Ratios on Long Term Credit Ratings: Using the Automotive Examples of BMW Group. Web.

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Billabong International Limited. (2009). Billabong Full Financial Report. Director’s Report.

Billabong International Limited. (2011). Billabong Full Financial Report. Director’s Report.

Brigham, E. F. & Houston, J. F. (2009). Fundamentals of Financial Management. US: Cengage Learning.

Bull, R. (2007). Financial ratios: How to use financial ratios to maximise value and success for your business. New York: CIMA publishers.

Spencer, T. (2010). Financial Analysis. Select Knowledge Limited.

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